The earnings yield of Nifty 50 index has exceeded bond yield by 45 basis points, a report by ICICI Securities said. In the past when earnings yield exceeded bond yields, stock market returns surpassed expectations.
Equities have taken a beating on Dalal Street since the end of last month, with the 50-stock NSE Nifty falling 14.2 per cent since the start of this year. First, it was the budget, when stock markets plummeted; and then came Coronavirus breaching borders and spreading across the globe. However, there’s one good news amidst this for investors. The earnings yield of Nifty 50 index has exceeded bond yield by 45 basis points, a report by ICICI Securities said. In the past when earnings yield exceeded bond yields, stock market returns surpassed expectations.
“Currently earnings yield of the NIFTY50 index exceeds bond yield by 45 basis points and such instances have provided high expected returns in the past. Examples include ‘Demonetisation’ (44 bps) and ‘Taper Tantrum’ (44 bps),” the report said. Nifty 50 forward PE stood at 15.4 while the 10-year bond yield was at 6.14. The report points out that 30 of the 50 Nifty50 stocks have a forward earnings yield of more than 6 per cent. Meanwhile, from a large universe, 60 per cent of the micro-cap firms have trailing earnings yield of more than 6 per cent.
ICICI Securities claimed that recession looks unlikely as the Coronavirus impact on the global economy is being monitored. “Unlike the above events, which caught policy makers unawares, the COVID-19 episode is being carefully monitored and pre-emptive measures have been taken by governments and central banks through fiscal and monetary stimulus which reduces the probability of a recession,” the report added.
A stimulus to the equity markets, amidst the slump in benchmark indices has been the falling crude oil prices. Although the falling prices are a negative impact on upstream oil companies, it is a boost for government finances, stimulus for consumption, and reduces input costs for companies, the report said.
JM Financial has highlighted similar opportunities saying, “Even though events are still unravelling and while we remain in the low growth camp, we are also beginning to see opportunities in stocks where cash flow visibility is high and/or valuations are beginning to build in a bear case.” The brokerage suggests that given the low risk of inflation with food and oil prices coming down, earnings yield suggests that market valuation does not look stretched even if earnings for markets are cut by up to 10 per cent.
ICICI Securities lists Bharti Airtel, NTPC, Titan, Jubilant Foodworks, HUL, Ultratech Cement, Cipla, SBI Life, Balkrishna Industries, Brigade Enterprises, Century plyboards, Havells, and Indigo as its top picks under the current scenario.